Supreme Court Refers Kerala's Borrowing Limit Issue to Constitution Bench

Summary:

• SC refers Kerala's query on state's right to raise borrowing limits to Constitution Bench.

• Issues include fiscal decentralisation, federalism, and central borrowing ceilings.

• Kerala's suit claims central restrictions endanger state's financial stability.

Important Points:

• Kerala questions "enforceable right" to adjust borrowing limits.

• SC to examine if central restrictions conflict with RBI's role as public debt manager.

• Division Bench skeptical of Kerala's financial management, denies interim relief.

• Centre provided ₹13,608 crore relief to Kerala, deemed sufficient for now.

Additional Information to Remember:

• Article 293 of the Constitution lacks clarity on state borrowing, creating legal vacuum.

• This marks a historic review of Centre-State financial relations by the Constitution Bench.

Fiscal federalism in India is a critical aspect of the country’s governance, reflecting the division of financial responsibilities and powers between the central and state governments. This system is designed to ensure a balance between national unity and state autonomy, with various constitutional provisions and institutional frameworks guiding this delicate balance. Let's break down the key components related to fiscal federalism, including the role of the Constitution Bench, Article 293, the Reserve Bank of India (RBI)'s involvement, central borrowing ceilings, and the provisions for financial emergency.

Fiscal Federalism: Core Concepts

• Definition: Fiscal federalism refers to the financial relations between different levels of government in a federal system. It encompasses the allocation of resources, revenue sharing, and financial regulations to ensure both central oversight and state flexibility.

• Objective: To balance the economic strengths of the nation with the need for regional autonomy and development.

Constitution Bench and Article 293

• Constitution Bench: A special bench of the Supreme Court of India, often convened to address significant matters related to the Constitution, including disputes or clarifications related to fiscal federalism.

• Article 293: Provides states with the autonomy to borrow within certain limits but requires the Centre's consent for borrowing if the state already has outstanding loans or guarantees provided by the Government of India.

Reserve Bank of India (RBI) and Central Borrowing Ceilings

• RBI's Role: Acts as the central bank and regulator of the financial system, playing a crucial role in managing the government's borrowing program and overseeing state borrowings to ensure macroeconomic stability.

• Central Borrowing Ceilings: The central government, often in consultation with the RBI, sets borrowing limits for itself and can influence state borrowing limits to manage overall fiscal health and prevent excessive debt accumulation.

Financial Emergency and Federalism

• Financial Emergency (Article 360): This constitutional provision allows the President of India to declare a financial emergency if the financial stability or credit of India or any part thereof is threatened.

• Implications for Federalism: During a financial emergency, the central government gains extensive powers over the states, including the ability to direct state financial policies and restrict state borrowings, affecting state autonomy.

Key Points to Remember

• State Autonomy vs. Central Supervision: Fiscal federalism in India aims to maintain a balance between granting financial autonomy to states and ensuring central oversight to preserve macroeconomic stability.

Reason it's important : SC refers Kerala govt.’s suit on net borrowing cap to five-judge Bench

Published in : The Hindu

Date appeared in newspaper : 02 April 2024

Link to the article (might require a paid subscription) : https://www.thehindu.com/todays-paper/2024-04-02/th_international/articleGMUCK8AR9-6327466.ece